Despite China’s Significant Economic Expansion The Stock Market Has Shown Minimal Growth

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, Forehand, and Carbonneau discussed Despite China’s Significant Economic Expansion The Stock Market Has Shown Minimal Growth. Here’s an excerpt from the episode:

Tobias: One of you guys was saying that there’s a big bifurcation between the performance of the economy and the performance of the stock market in China.

Jack: Yeah. Well, I think it was economic Jake, who shared that on Twitter. I think the economy is up several fold over whatever it is, 20 years or whatever it is, and the stock market is up zero. So, the whole idea of the economy is not the stock market. If you want an example to prove that’s the example. The economy has gone crazy and the stock market has literally returned zero. That’s a pretty amazing stat.

Tobias: There’s that famous Triumph of the Optimists that– It comes out once a year. They update all the data for the world, and that’s that Elroy Dimson, Marsh, Staunton, something like that.

Jake: Yeah, Marsh and Dimson.

Tobias: Dimson. That’s right. They made the comparison. I put this in one of my books, like a 2004– I think it was in Deep Value, where they looked at the performance of China as an economy and the performance of its stock market versus the performance of England as an economy and the performance of its stock market. And even though England has eclipsed in 1950 and losing its global dominance since 1950, the stock market had massively outperformed. Whereas China has been growing phenomenally quickly through that whole period, but the stock market performance has been nothing like even England’s stock market performance. The reason is that you’re just overpaying for China.

It’s clear when you look at the chart that Jake was talking about earlier. In Chinese stock market in terms of a PE basis, peaked in 2008, and it’s been compressing since 2008, which is a long time. So, it’s like being a value investor. Multiples running against you for like 16 years, something like that.

Jake: That can happen. Buffett’s pointed out that 17-year cycle in the US even of– And that was like the 20th century [crosstalk]. Yeah. And before that, though, you had– whatever.

Tobias: 66 to 86.

Jake: Yeah, 65 to 82, where you went nowhere. And on a real basis, I think it was even worse. But yeah, there’s lots of doldrums to sail through in this ocean. It’s not always just up into the right.

Justin: I guess what I don’t know about the Chinese market is you know how– You think about the US market, US investors and how much exposure we have to the stock market as investors here and how that’s grown over the last 25 years in terms of– or even maybe since the 1960s or 1970s, it used to be pension plans. And then now most of the time people are investing in stocks to save for their retirement. I don’t know, in China, how their consumers [crosstalk] their–

Tobias: What the penetration is.

Justin: Yeah, the penetration. So, it’s like you could see if that’s– because you hear about the wages in China and how much– So, it’s interesting. You would think there’d be global demand for their equities, the shares in China, but I think to some extent what happened with Russia and Ukraine and the sanctions there that could put– It certainly puts some risk in terms of exposure to the Chinese market in the sense that something goes down with Taiwan or something like that. So, it could be that overhang as well, that is affecting things.

Tobias: Also, as we’ve discussed in the context of Alibaba that it’s not entirely clear what your ownership interest is. It’s through those VIE, those vehicles, which Jake knows a lot more about than I do. But you don’t have direct ownership. You’ve got this proxy ownership, and it’s not clear what your rights are. It’s hard to enforce them ultimately.

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